QUESTION 1.2-INTERNATIONAL BUSINESS

MGMK 4710

INTERNATIONAL BUSINESS

CHAPTER 3. THE POLITICAL AND LEGAL ENVIRONMENTS

I. INTRODUCTION

For a multinational enterprise to succeed in countries with different political and legal environments, its management must carefully analyze the fit between its corporate policies and the political and legal conditions of each particular nation.

http://www.theglobaleconomy.com/indicators_list.php

( Go to Global Rankings, and then select:

+ Governance, Institutions, corruption

+ Country risk indicators

II. THE POLITICAL ENVIRONMENT

A political system is the complete set of institutions, organizations, and interest groups involved in who gets to decide on the goals of a country and how those goals are to be achieved. The political system is influenced by culture (particularly the role played by the individual versus the collectivity).

A. Individualism versus Collectivism

In individualistic societies, the government plays a limited role in business. The relationship between government and business tends to be adversarial. The government promotes marketplace competition, but may intervene to deal with market imperfections (e.g. monopoly). The concept that the government should not interfere in business affairs is captured in the idea of laissez-faire. In collectivist societies, the government defines economic needs and priorities, and centrally planned business activities. The government is highly connected to and interdependent with business, so the relationship is cooperative.

B. Political Systems:

1. Democracy: political system in which citizens participate in the decision-making and governance process, either directly or through elected representatives. The main characteristics of a democracy are:

- Authority: clear separation of power among three branches of government

- Elections: citizens elect freely their representatives. Elections allow citizens to participate in the decision-making process

- Rights: freedom of opinion, expression, press, religion, association and access to information; freedom of organization (e.g. freedom to start a business)

- Political risk: low because if citizens are unhappy, they can change their representatives through elections

There are three main variations of democracy:

- Presidential democracy: citizens elect a president (United States)

- Parliamentary democracy: the party with the most votes after elections designates a prime minister (United Kingdom)

- Mixed democracy: citizens elect a president, and the party with the most votes after elections designates a prime minister (France)

2. Totalitarianism: political system in which one person or party monopolizes power, and citizens do not participate in the decision-making and governance process. The main characteristics of totalitarianism are:

- Authority: all branches of government are controlled by one person or one party

- Elections: citizens are not allowed to elect their representatives (or elections are fake, and they results are made up in an office by the leader or the party)

- Rights: no freedom of opinion, expression, press, religion, association, access to information, organization (no freedom to start a business)

- Political risk: high because are citizens not represented. The government use police to suppress dissent (this can lead to riots, protests, wars and chaos)

There are three main variations of totalitarianism:

- Theocracy: religious leaders are also the political leaders (Iran)

- Secular totalitarianism (dictatorship or right wing): using the military, the government exercises absolute power through the authority of the state (Congo)

- Communism: the communist party controls all power (China)

C. Trends in Political Ideologies

The world is experiencing general movements toward democracy. Several factors have powered the democratization of the world, including:

- Standards of living: many totalitarian regimes failed to improve the economic lives of their citizens, who eventually challenged the right of the state to govern.

- Technologies: vastly improved communications technology weakened the ability of regimes to control people’s access to information

- Globalization: factors such as interdependence among nations, regional integration, and multinational institutions (World Bank, International Monetary Fund, World Trade Organization, etc.) pressure totalitarian regimes to open their political space and allow more freedom.

E. Political Risk

Political risk is the possibility that political conditions will affect a country's business environment in ways that will cost investors some or all of the value of their investment or force them to accept lower than projected rates of return. Leading sources of political risk are: expropriation (nationalization), war between countries, civil war (within a country), unilateral breach of contract, destructive government actions, harmful actions against people, and discriminatory taxation policies. The global economic crisis has only served to increase political risk as governments take exceptional measures against the groups they blame.

III. THE LEGAL ENVIRONMENT

A legal system is the mechanism for creating, interpreting, and enforcing the laws in a country. The three components of modern legal systems are constitutional law, criminal law, civil and commercial laws.

A. Types of Legal Systems: The main legal systems are:

1. Common law: legal system based on tradition, judge-made precedent, custom, and usage. Courts play an important role in interpreting the law. Common law started in England, then it spread to former British colonies, including Australia, Canada, New Zealand, and the United States. Key characteristics include:

- More flexibility: judges resolve disputes based on their interpretation of the law

- More confrontational: lawyers argue so that judges interpret the law in their favor

2. Civil law: legal system that uses a detailed and comprehensive set of statutes and codes as a primary means to form legal judgments. Courts play an important role in applying the law. Derived from Roman law, it is the oldest, the most influential, and the most widely distributed around the world (civil law nations include Latin European countries, Germany, Japan). Key characteristics include:

- Less flexibility: judges resolve disputes by applying the law (no interpretation).

- Less confrontational: detailed statutes and codes serve to guide judges’ rulings

3. Theocratic law: legal system based upon religious teachings. Today, the only surviving theocratic legal system formally practiced by some governments is the Islamic law (examples include Iran and Saudi Arabia). Key characteristics are:

- Less flexibility: judges resolve disputes by strictly following the Koran

- Less confrontational: teachings from the Koran serve to guide judges’ rulings

B. Trends in Legal Systems: Countries can be classified as following either:

- Rule of man : The rule of man places ultimate power in the hands of one person and is the cornerstone of totalitarian governments. A the rule of man is dominant in totalitarian (and poor) nations, MNEs’ managers that conduct business there should expect to find inconsistent and sometimes changing laws

- Rule of law: The rule of law is the hallmark of democratic governments and holds that authority comes from written and transparent laws. The rule of law flourishes in well-to-do industrialized countries such as the United States, Japan, and most of Europe

C. Legal issues in international business

Doing business in multiple countries that have different and conflicting legal systems and practices raises major issues for MNEs. Of a particular concern is how laws are enforced in totalitarian countries where courts that handle legal matters are not free from political interference. Legal issues of concern include:

1. Country of Origin and Local Content: Local content is important to

all nations, and most countries push foreign firms to add value locally. In addition, product origin determines applicable fees and may be subject to quantitative restrictions as well. The global credit crisis highlights this concern in the ongoing political debate.

2. Marketplace Behavior: National laws determine permissible practices

in pricing, distribution, advertising, and the promotion of products, and they vary widely from one country to another.

3. Product Safety and Liability: Often products must be customized in

order to comply with local standards, which may be higher than those found in a firm’s home market. While product liability laws are very stringent in markets such as the United States, they are spotty, absent, and at times even arbitrary in many less developed countries.

4. Legal Jurisdiction. Every country specifies which law should apply

and where litigation should occur when agents are involved—whether they are legal residents of the same or different countries.

5. Intellectual Property Rights

- Definition: Intellectual property rights consist of ownership rights to intangible assets, i.e., the right to control and derive the benefits from writing and other creative art forms (copyright), inventions (patents), and identifiers (trademarks).

- MNEs’ concern: Problems arise because intellectual property, whether in the form of literature, music, design, software, scientific patents, or brand names, is difficult to create but easy to duplicate. Cross-national and cross-cultural legal differences complicate specifying, regulating, and enforcing intellectual property rights. The costs of piracy, whether in terms of lost sales and royalties or future creativity, are very high for registered owners.

- Piracy: piracy is rooted in fundamental legal, economic, and cultural forces. While some countries may impose prohibitions on piracy, local authorities may actually encourage violations. Many of these problems stem from legal legacies in emerging markets where the rule of man applies. Generally, less developed countries provide weaker legal protection for intellectual property than do industrialized nations. While less developed nations feel they have little to gain by protecting intellectual property, developed nations feel it is critical to assuring continuing creativity.